COURT OF APPEAL FOR ONTARIO

DATE: 20211125 DOCKET: C68768

Strathy C.J.O., Pepall and Pardu JJ.A.

BETWEEN

Claire Baldwin Plaintiff (Appellant)

and

Imperial Metals Corporation, J. Brian Kynoch, Andrew Deepwell, Larry G. Moeller, Laurie Pare, N. Murray Edwards, Edco Financial Holdings Ltd. and Edco Capital Corporation Defendants (Respondents)

Counsel: Michael G. Robb, Kevin Richard, Garett Hunter and Bethanie Pascutto, for the appellant Lawrence E. Thacker, Aoife Quinn and Kathleen Glowach, for the respondents

Heard: September 14, 2021 by video conference

On appeal from the order of Justice Edward P. Belobaba of the Superior Court of Justice, dated September 23, 2020, with reasons reported at 2020 ONSC 5616, 152 O.R. (3d) 774.

Strathy C.J.O.:

A. Introduction

[1] This appeal considers the role of “public correction” in a shareholder’s proposed class action for misrepresentation in the secondary securities market, pursuant to s. 138.3 of the Securities Act, R.S.O. 1990, c. S.5.

[2] That same issue was considered by this court in a decision released in February of this year: Drywall Acoustic Lathing and Insulation, Local 675 Pension Fund v. Barrick Gold Corporation, 2021 ONCA 104 (“Barrick OCA”), leave to appeal refused, [2021] S.C.C.A. No. 202, and rev’g 2019 ONSC 4160, 148 O.R. (3d) 755 (“Barrick SCJ”).

[3] The motion judge in this case, who followed his own decision in Barrick SCJ, did not have the benefit of Barrick OCA when he dismissed the appellant’s motion for leave to pursue the statutory remedy under s. 138.8 of the Securities Act. After the release of that decision, and before argument of this appeal, this court requested additional written submissions from the parties on the impact of Barrick OCA on this appeal.

[4] For the reasons that follow, I would allow the appeal and remit the leave motion to the Superior Court for determination.

B. Background

(1) The Facts

[5] The facts necessary for the disposition of this appeal can be briefly stated.

[6] The respondent Imperial Metals Corporation (“Imperial”) is a reporting issuer in Ontario. Its shares trade on the Toronto Stock Exchange.

[7] The appellant is an individual shareholder. She pleads that she acquired shares of Imperial during the class period (defined as August 15, 2011 to August 4, 2014, inclusive) and held some or all of those shares at the end of the class period.

[8] On August 4, 2014, Imperial issued a press release, reporting that the tailings storage facility (the “TSF”) at its Mount Polley gold and copper mine in British Columbia had been breached, releasing an “undetermined amount of water and tailings”. The press release stated that the cause of the breach was unknown.

[9] Following this disclosure, Imperial’s share price declined by 40% and the company lost about $500 million in market capitalization.

[10] As a result of the failure of the TSF, millions of cubic metres of liquid mining waste were released into the surrounding environment. Government authorities and independent commissions investigated and produced reports on the circumstances of the TSF breach.

[11] This action pursuant to s. 138.3 of the Securities Act was commenced by notice of action filed three days after the failure of the TSF. The statement of claim was issued one month later, on September 8, 2014. The appellant alleged that the breach of the TSF was caused by deficiencies in its design, construction, and operation.

(2) The Statutory Cause of Action

[12] Section 138.3, contained in Part XXIII.1 of the Securities Act, creates a cause of action for misrepresentation in the secondary securities market. It complements ss. 130 and 131, contained in Part XXIII, which create statutory causes of action for misrepresentation in the “primary” market, in a prospectus, offering memorandum, or take-over bid circular.

[13] Section 138.3(1) provides:

Where a responsible issuer or a person or company with actual, implied or apparent authority to act on behalf of a responsible issuer releases a document that contains a misrepresentation, a person or company who acquires or disposes of the issuer’s security during the period between the time when the document was released and the time when the misrepresentation contained in the document was publicly corrected has, without regard to whether the person or company relied on the misrepresentation, a right of action for damages against, [the responsible issuer, directors, certain officers, influential persons and experts.] [Emphasis added.]

[14] Section 138.8(1) contains a screening mechanism: no action may be commenced under s. 138.3 without leave of the court and the court shall only grant leave where it is satisfied that (a) the action is being brought in good faith; and (b) there is a reasonable possibility that the action will be resolved at trial in favour of the plaintiff. In Theratechnologies inc. v. 121851 Canada inc., 2015 SCC 18, [2015] 2 S.C.R. 106, Abella J. stated that the leave requirement was intended to be more than a “speed bump” and requires a reasoned consideration of the evidence to ensure the action has a reasonable possibility of success.

[15] For the purpose of this appeal, it is unnecessary to describe the genesis or content of the statutory scheme in any detail. This ground has been thoroughly covered by the decision of the Supreme Court in Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60, [2015] 3 S.C.R. 801, at paras. 63-69 and the decision of this court in Rahimi v. SouthGobi Resources Ltd., 2017 ONCA 719, 137 O.R. (3d) 241, per Hourigan J.A., at paras 35-49, leave to appeal refused, [2017] S.C.C.A. No. 443.

[16] Based on the recommendations of the Allen Committee in 1997, [1] Part XXIII.1 was aimed at deterring corporate non-disclosure, protecting investors, and incentivizing accurate and timely disclosure by public issuers, while avoiding the American experience of predatory “strike suits”. It was designed to be implemented through class actions, so as to realize the goals of access to justice for shareholders and behaviour modification in relation to public issuers of securities.

[17] Unlike the common law action for misrepresentation, which requires the plaintiff to prove that they relied on the misrepresentation, the statutory remedy does not require the plaintiff to prove reliance. A causal link between the misrepresentation and the plaintiff’s damages is presumed, and the defendant bears the onus of proving that some or all of the damages are “attributable to a change in the market price of securities that is unrelated to the misrepresentation or the failure to make timely disclosure”: Securities Act, s. 138.5(3). The statute contains caps on corporate and individual liability (s. 138.7(1)) and a defence of “reasonable investigation” (s. 138.4(6)).

[18] There has been some debate in the case law concerning the role of “public correction” in the statutory scheme. Section 138.3(1) provides the remedy to anyone who “acquires or disposes of the issuer’s security during the period between the time when the document [containing the misrepresentation] was released and the time when the misrepresentation contained in the document was publicly corrected”. The case law diverges on the question of whether public correction is an element of the statutory cause of action or simply a time-post to identify and delimit the members of the class.

[19] In Barrick OCA, Hoy J.A. did not find it necessary to resolve this question, finding that in any event public correction is a “necessary part of the statutory scheme”: at para. 41. Later in her reasons, she observed that the Allen Committee “appears to have viewed a public correction simply as part of the statutory scheme — a necessary time-post for the proposed class period and any eventual damages calculation”: Barrick OCA, at para. 66. She noted that the Committee appears to have assumed that the misrepresentation would be corrected or that the necessary disclosure would be made. She concluded that “[i]f the Committee intended to limit the proposed statute’s applicability only to those misrepresentations later explicitly corrected, it is surprising that it did not so indicate in its otherwise extensively canvassed report”: Barrick OCA, at para. 67.

(3) Allegations in the Statement of Claim

[20] In her second fresh as amended statement of claim, the appellant seeks, among other things, leave to commence a statutory action pursuant to s. 138.3 of the Securities Act, and an order certifying the action as a class action under the Class Proceedings Act, 1992, S.O. 1992, c. 6 and appointing her as the representative plaintiff.

[21] The appellant asserts that Imperial was negligent in the design, construction, and operation of the TSF. She claims that Imperial’s disclosure documents contained untrue representations, omitted material facts that were required to be stated, and omitted material facts that were necessary to make other statements not misleading in light of the circumstances in which they were made. She alleges that “the truth was revealed” by the breach of the TSF and the press release on August 4, 2014, which she pleads were “corrective” of the misrepresentations.

[22] On behalf of herself and all other class members, the appellant asserted the statutory remedy in s. 138.3(1), the remedy for primary market misrepresentation in s. 132.1(1) of the British Columbia Securities Act, R.S.B.C. 1996, c. 418 in relation to an offering memorandum, negligence simpliciter, and common law negligent misrepresentation.

(4) The Motion Judge’s Reasons

[23] Relying on his reasons in Barrick SCJ, the motion judge dismissed the appellant’s motion for leave under s. 138.8(1) of the Securities Act. He found that to obtain leave under the Act, the plaintiff must allege not only a misrepresentation but also some discrete and identifiable public correction. That correction, he said, must be reasonably capable of revealing to the market the existence of an untrue statement of material fact or an omission to state a material fact. At the outset of his reasons, he stated, at para. 1:

In a motion for leave under s. 138.8 of the Securities Act, it is not enough to allege a secondary market misrepresentation. There must also be some evidence of a public correction. Absent a public correction, the statutory action for damages is not available and the motion for leave must be dismissed. [Footnote omitted.]

[24] Later, the motion judge observed that s. 138.3(1) makes it clear that the statutory right of action does not arise unless the plaintiff can point to both an alleged misrepresentation and a public correction of the misrepresentation. Relying on his decision in Barrick SCJ, he stated, at para. 10:

Absent a discrete and identifiable public correction (whether provided by the defendant company or a third party) there is no basis for a s. 138.3 misrepresentation action – the absence of a public correction is “dispositive” and there is no need to proceed further and consider whether leave should be granted under s. 138.8. [Footnotes omitted.]

[25] He continued, at paras. 11-13:

In the Barrick Gold leave motion, I summarized how this court has defined "public correction." It is sufficient for the purposes of this motion to focus on what in my view is the key requirement: the public correction must be reasonably capable of revealing to the market the existence of an untrue statement of material fact or an omission to state a material fact.

In other words, there must be some indication in the alleged public correction (when compared to an earlier material disclosure) that the earlier material disclosure contained a misstatement or was misleadingly incomplete.

If the alleged public correction, on a fair reading (and in comparison to an earlier disclosure) does not provide some indication that the earlier disclosure was not truthful or was misleadingly incomplete, then there is no public correction and no basis for the proposed s. 138.3 action. [Footnotes omitted.]

[26] The motion judge did not find it necessary to determine whether Imperial’s public statements about the safe design, construction, or operation of the mine contained misrepresentations, because Imperial argued – and the motion judge agreed – that none of the statements had been publicly corrected.

[27] The motion judge found that the press release issued on August 4, 2014 could not be a public correction because it said nothing more than (1) the TSF had been breached; (2) the cause of the breach was unknown; and (3) the company was working with the authorities to assess the damage. There was nothing in the press release to indicate that the breach of the TSF was caused by deficient design, defective construction, or problems in operation. There was nothing to correct any misrepresentation or to indicate to an informed reader or analyst that what the company had previously said about the subjects was untrue or misleading. Nor was there anything in the press release that, on a fair reading, could be linked to any of the alleged misrepresentations. “Put simply”, the motion judge said, “the news that the TSF has failed for reasons that are unknown does not amount to a correction of anything that was stated previously”: at para. 28.

[28] The motion judge said that the press release could only have served as a correction if the earlier misrepresentation had stated, “The TSF is built to be failproof, and will never, ever fail.” Had that been the misrepresentation, the press release advising that the TSF had indeed failed would arguably have been a public correction of the earlier misstatement.

[29] The motion judge concluded that the required public correction had not been established and there was no reasonable possibility that the appellant could show otherwise at trial.

(5) The Barrick Decisions

[30] To frame the analysis of the issues in this appeal, it is necessary to review the motion judge’s reasons in Barrick SCJ and this court’s reasons for directing a new hearing in that case.

[31] In Barrick SCJ, as in this case, the motion judge dealt with a motion for leave under s. 138.8 of the Securities Act. The plaintiffs sought to bring a class action against Barrick Gold on the basis of alleged misrepresentations and omissions in its public disclosures concerning a mining project in Chile and Argentina. The motion judge denied leave for most of the alleged misrepresentations on the basis that they had not been publicly corrected.

[32] The motion judge observed that public correction plays an important role in the statutory scheme under Part XXIII.1. It not only serves to identify the nature and extent of the misrepresentation allegation, but also gives notice to the defendant of the case it has to meet, and acts as a “time-post” for the proposed class period and the calculation of damages: Barrick SCJ, at para. 15.

[33] In the motion judge’s view, expressed at paras. 16 and 19 of Barrick SCJ, public correction is also a constituent element of the statutory cause of action:

In the absence of a discrete and identifiable public correction (whether provided by the defendant company or a third party) there is no basis for a s. 138.3 misrepresentation action - the absence of a public correction is “dispositive” and there is no need to proceed further and consider whether leave should be granted under s. 138.8.

If the alleged public correction, on a fair reading, does not arguably reveal to the market the existence of the alleged misrepresentation - that is, the existence of the allegedly untrue assertion or the alleged omission in the impugned representation - then there is no public correction and no basis for the proposed s. 138.3 action. [Footnotes omitted.]

[34] As he did in this case, the motion judge said that the leave application could be determined by assuming misrepresentations had been made and focusing on whether the public correction requirement had been satisfied. He dismissed most of the claims on the basis that there was nothing in the alleged corrections that provided a link to the alleged misrepresentations or omissions or that was capable of revealing their existence.

[35] This court, speaking through Hoy J.A., allowed an appeal from the motion judge’s order: Barrick OCA. It directed that the issue of leave with respect to certain alleged misrepresentations should be remitted to a judge of the Superior Court.

[36] As mentioned, Hoy J.A. did not find it necessary to determine whether “public correction” is an element of the statutory cause of action, but she observed that it is a “necessary part of the statutory scheme”: Barrick OCA, at para. 41. She said that the approach taken by the motion judge – assuming the alleged misrepresentations are made out and denying leave on the basis that there is no reasonable possibility that a trial court would find that there was a public correction – “is an approach that should be used rarely” and with “great caution”: Barrick OCA, at para. 46. She added, at para. 48, that:

Judicial economy likely only outweighs the interests of an issuer and its shareholders in a finding as to whether there is a reasonable possibility that the trial court would find a misrepresentation and the risks entailed in assuming a misrepresentation when: the motion judge is faced with an overwhelming record; and the motion judge is confident that there is no material overlap between the evidence relevant to whether there is a misrepresentation, and the evidence of the context in which the alleged public correction was made and how the alleged public correction would be understood in the secondary market.

[37] Hoy J.A. also found that the motion judge erred in engaging in a purely textual reading of the proposed public correction: Barrick OCA, at paras. 53-54. A proper analysis would also require an examination of the context in which the alleged public correction was made and how the alleged public correction would have been understood in the secondary market if it does not, on its face, reveal the existence of the alleged misrepresentation: Barrick OCA, at para. 48.

[38] Moreover, Hoy J.A. found that assuming the falsity of the misrepresentation may not be appropriate where the misrepresentation is not facially obvious. That may require the judge to consider evidence relevant to whether there is a reasonable possibility that a trial court will find a misrepresentation: Barrick OCA, at para. 48.

[39] Hoy J.A. explained that the same reasoned consideration of the evidence is necessary when the alleged misrepresentations are misrepresentations by omission. She disagreed with the motion judge’s statement that the alleged public correction, on a fair reading, must arguably reveal to the market the alleged omission of the material fact. She stated, at para. 76:

The public correction need not specifically identify the omitted material fact or specifically relate the information in the correction to the omitted material fact. As stated earlier, if the alleged public correction does not, on its face, reveal the existence of the alleged misrepresentation, the motion judge must engage in a reasoned consideration of evidence concerning the context in which the alleged public corrections were made and how the alleged public corrections would be understood in the secondary market. The critical question for the motion judge is whether the alleged public correction was reasonably capable of being understood in the secondary market as correcting what was misleading in the impugned statement. [Footnote omitted.]

C. Issues and Submissions on Appeal

[40] The primary issue before us is the role of public correction in the statutory remedy and whether the motion judge took an “impermissibly narrow approach to determining whether the alleged misrepresentations were publicly corrected”: Barrick OCA, at para. 5.

[41] The appellant submits that the motion judge erred by adopting the same approach this court disapproved of in Barrick OCA. The motion judge misapprehended the role of public correction in the statutory cause of action under s. 138.3, which caused him to undertake a purely textual analysis of the correction, without regard to the evidentiary context of the misrepresentation and of the public correction. He construed public correction as an element of the right of action that must be pleaded and proven, rather than as a “time-post” to identify those shareholders who are class members entitled to the benefit of the statutory cause of action.

[42] The appellant contends the motion judge erred in requiring that the public correction be effectively the “mirror-image” of the misrepresentation, an approach she says would incentivize public issuers to make vague, incomplete, and piecemeal disclosure.

[43] The appellant submits that there is at least a reasonable possibility that she will satisfy the statutory test: the public correction made by the press release was the direct manifestation of the specific and identifiable risk that the appellant alleges ought to have been disclosed – namely, the risk that the TSF might fail. The statutory right of action should be read in a manner that will incentivize both the avoidance of misrepresentations, and their prompt and thorough public correction where identified.

[44] The respondent submits that this is, in fact, one of those cases contemplated by this court in Barrick OCA, where a judge can resolve the motion and deny leave because there is no reasonable possibility that a trial court would find that there has been a public correction of the pleaded misrepresentation.

[45] The respondent submits that whether public correction is a “feature” of the statutory cause of action or an “element” of the statutory cause of action is a distinction without a difference. The threshold test in s. 138.3 requires that a “correction” be pleaded and proven by the plaintiff. The respondent submits that the issue of whether public correction is an element of the statutory cause of action was not disputed before the motion judge and should not be addressed in this court. The respondent submits that the motion judge’s determination that the press release could not constitute a public correction was a determination of mixed fact and law and is entitled to deference.

D. Analysis

[46] I do not propose to address the issue of whether public correction is an element of the statutory cause of action. It was not fully argued in the court below and it is unnecessary to resolve it in order to dispose of this appeal. As Hoy J.A. observed in Barrick OCA, however, public correction is a “necessary part of the statutory scheme”: at para. 41.

[47] The overarching question for the purpose of the leave motion is “whether the alleged public correction was reasonably capable of being understood in the secondary market as correcting what was misleading in the impugned statement”: Barrick OCA, at para. 76. See also: Swisscanto v. Blackberry, 2015 ONSC 6434, at para. 65; The Trustees of the Drywall Acoustic Lathing and Insulation Local 675 Pension Fund v. SNC-Lavalin Group Inc., 2016 ONSC 5784, at para. 147; Cappelli v. Nobilis Health Corp., 2019 ONSC 2266, at para. 143; Kauf v. Colt Resources, Inc., 2019 ONSC 2179, 145 O.R. (3d) 100, at para. 124.

[48] In my respectful view, the motion judge set the bar too high by requiring that the public correction be express and directly linked to a specific misrepresentation, which, he said, would have to have been something like: “The TSF is built to be failproof, and will never, ever fail.” To paraphrase the observation of Hoy J.A. in Barrick OCA, there need not be facial symmetry between the public correction and the alleged misrepresentation or omission: at para. 76.

[49] I adopt the observations of Hoy J.A. in Barrick OCA with respect to the role of public correction in the statutory cause of action. Unlike the common law action for misrepresentation, which is theoretically available in this case and in other claims for misrepresentation in the securities context, the plaintiff and class members asserting statutory claims for secondary market misrepresentation are not required to plead or establish causation – that is, that they relied on the misrepresentation in acquiring the securities. The statute effectively deems reliance.

[50] Absent the need to prove causation, misrepresentation does the heavy lifting in the statutory cause of action. It is the wrong at issue and it forms part of the context in which the public correction operates and would be understood by the market. In most cases, the trial judge (or the judge on the s. 138.8 leave motion) will be required to consider the misrepresentation(s) or omission(s), the alleged public correction, and the context of both to determine whether the misrepresentation was corrected. It will remain open to the defendant to establish that the drop in the share price was caused by general market conditions, or by a specific development in the issuer’s business or the industry that was not a consequence of the inadequate disclosure: see Committee on Corporate Disclosure, Toward Improved Disclosure: A Search for Balance in Corporate Disclosure, interim report (Toronto: Toronto Stock Exchange, 1995), at para. 6.43.

[51] While public correction is a necessary part of the statutory scheme, its role, at least at the leave stage, is a modest one. Hoy J.A. clearly considered this to be the case when she observed in Barrick OCA, at para. 71, that:

Where there is a reasonable possibility of a misrepresentation, the plaintiff’s claim can hardly be characterized as a strike suit. Furthermore, the clearing of the misrepresentation threshold, combined with the fact that the plaintiff brought an action, suggests that there was a public correction. The plaintiff must have learned of the misrepresentation somewhere. [Footnote omitted.]

[52] The role of public correction was not set out by the Allen Committee and, as Hoy J.A. observed, the committee appears to have assumed that the misrepresentation would be corrected or the necessary disclosure would be made: Barrick OCA, at para. 67.

[53] In many cases, perhaps most, the public correction will clearly reveal the existence of the alleged misrepresentation and the Allen Committee may have assumed that would be the case. Indeed, most of the secondary market misrepresentation cases that have come before the courts in Canada have involved express public corrections. But that does not necessitate an express correction or preclude the plaintiff from asking the court to infer a correction based on something other than an express statement by the company, coupled with the market’s response.

[54] As the motion judge himself noted in Swisscanto, the public correction need not be a “mirror-image” of the alleged misrepresentation or a “direct admission that a previous statement is untrue”: at para. 62, citing Ironworkers Ontario Pension Fund (Trustee of) v. Manulife Financial Corp., 2013 ONSC 4083, at paras. 64-71. There need only be “some linkage or connection between the pleaded public correction and the alleged misrepresentation”: Swisscanto, at para. 65; SNC-Lavalin, at para. 147; Cappelli, at para. 143; Kauf, at para. 124. That linkage or connection will assist the judge in determining how the alleged corrective disclosure would be understood in the secondary market.

[55] Moreover, as the motion judge also observed in Swisscanto, the public correction need not be issued by the company itself and can emanate from third parties: at para. 62; see also Mask v. Silvercorp Metals Inc., 2015 ONSC 5348, at para. 29.

[56] The modest role of public correction in the statutory cause of action is consistent with s. 138.5(3) of the Securities Act, mentioned earlier, which places the onus on defendants to prove that some or all of the plaintiffs’ damages are attributable to a change in the market price of securities that is unrelated to the misrepresentation. This would leave it open to the defendants to prove that the alleged public correction is not a correction at all, because the change in market price was due to other factors.

[57] Focusing on the market’s understanding of the alleged correction is also consistent with one of the core purposes of the statutory framework – to incentivize fair and accurate disclosure by public issuers. Permitting an issuer to escape liability by making vague or general disclosures (“something has happened and we are looking into it”) is inconsistent with that core purpose. It would undermine confidence in the securities market and deprive shareholders of compensation.

[58] I conclude that, in light of Barrick OCA, the motion judge erred by imposing an unduly onerous standard for establishing public correction. This was an error of law and is reviewable on a correctness standard: see Mask v. Silvercorp Metals Inc., 2016 ONCA 641, 132 O.R. (3d) 161, at paras. 36-37.

[59] Furthermore, this was not one of those rare cases alluded to by Hoy J.A. in Barrick OCA, in which the motion judge could fairly and safely dispose of the requirement to determine whether the issuer released a document that contains a misrepresentation and conclude that there is no reasonable possibility that the action will be resolved at trial in favour of the plaintiff.

[60] As the motion judge observed, the record was voluminous, and the allegations of misrepresentations and omissions were hotly contested. The motion judge decided, however, that he did not have to deal with the misrepresentation issues because he found, based on a purely facial reading of the press release, that there was no public correction.

[61] Without an examination of the evidence concerning the alleged misrepresentations or omissions – what they were, when they occurred, and the context in which they were made – it would be impossible for the motion judge to determine whether the alleged public correction was reasonably capable of being understood in the market as correcting what was misleading in the impugned statement. Depending on what had been said, or not said, in Imperial’s public disclosures over the years concerning its waste management practices and environmental compliance measures, and the context in which the representations and the alleged public correction were made, a motion judge could find that the press release could be understood by the market as corrective and that there was a reasonable possibility that the action would be resolved in favour of the plaintiff at trial.

E. Disposition

[62] For these reasons, I would allow the appeal and remit the motion for leave to a judge selected by the Regional Senior Judge for the Toronto Region.

[63] The parties may make written submissions on costs. The appellant shall serve and file their submissions within 15 days of the release of these reasons and the respondent shall have 15 days to respond. The submissions shall not exceed 5 double-spaced pages in length, exclusive of costs outlines.

Released: November 25, 2021 “G.R.S.” “George R. Strathy C.J.O.” “I agree. S.E. Pepall J.A.” “I agree. G. Pardu J.A.”

[1] Committee on Corporate Disclosure, Responsible Corporate Disclosure: A Search for Balance, final report (Toronto: Toronto Stock Exchange, 1997).